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Nigeria Central Bank Yields Rise May Signal Naira Devaluation

Bloomberg logoBloomberg 2/6/2021 Tope Alake

(Bloomberg) -- A rise in the cost of Nigeria’s short-term debt and a weaker naira rate to sell dollars to investors in a month signal that the country’s central bank may devalue the currency for the third time in less than a year.

The monetary regulator in Africa’s largest economy almost doubled the returns on its higher yielding paper, moving the one-year maturity to 10% at an auction on Thursday, up from 5.7% a week ago, according to central bank data. Earlier this week, it sold one-month non-deliverable naira forward contracts for 412 naira per dollar from 405 naira on the FMDQ OTC Securities Exchange, an indication that it expects the currency to weaken.

chart: Higher Yields © Bloomberg Higher Yields

“These developments are signaling that the central bank may allow rates at the investors’ and exporters’ window to rise further, possibly to levels close to one-month futures prices” said Samir Gadio, the London-based head of Africa strategy at Standard Chartered Bank. “This rise in OMO bill yields, along with the upward re-pricing in futures, will increase market expectations of moderate naira devaluation in the near term.”

Africa’s largest crude producer has been reluctant to allow an adjustment of its currency after the oil-price crash early last year cut foreign-exchange inflows from official sources. Crude accounts for 90% of the West African nation’s export earnings. The rebound in oil prices in recent weeks would boost the central bank’s reserves and improve dollar reserves, which have been under pressure.

chart: Forwards suggest another naira devaluation is on the cards © Bloomberg Forwards suggest another naira devaluation is on the cards

The higher yields on central bank bills should attract offshore investors who have stayed away because of low returns and an overvalued currency, Rand Merchant Bank Johannesburg-based analysts Neville Mandimika and Daniel Kavishe wrote in a note to clients on Friday. “The next step in ensuring foreign portfolio inflows would be to adjust the currency and, judging by the activity in the onshore futures market, this could happen sooner rather than later.”

Video: 'Naira 4 Dollar' to Boost Nigeria Remittances (QuickTake)

Naira non-deliverable forward contracts rose on Friday, suggesting that devaluation pressure is increasing. The local unit weakened to 393.20 per dollar earlier on Friday on the spot market before strengthening to 381 at the close. It settled at 396.17 to the greenback on the investors’ and exporters’ window.

The central bank uses multiple exchange rates in lieu of a dollar peg, and depreciated the official rate of the local unit twice last year by about 24%. A Bloomberg survey of investors and analysts showed the naira may devalue by as much as 10% in 2021.

Gadio at Standard Chartered does not expect offshore portfolio managers to rush into Nigeria just yet, even though the recent moves by the regulator are encouraging. “Non-residents will require higher returns, less spot misalignment and a better forex-convertibility track record.”

(Updates closing naira rates in sixth paragraph.)

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